Stock Option Plans and Stock Based Compensation

The following is a summary of existing stock based compensation plans and outstanding shares as of December 31, 2011:

Plan Name

Shares Outstanding

Plan Expiration

Vesting Terms/Status

Option Term

Number of Shares Authorized

Resolution Performance 2000 Stock Option Plan

November 2010

8 yrs 30 days⁽¹⁾

n/a plan expired

Tranche A options

25,213

Fully vested

Tranche B performance options

48,788

Fully vested

Resolution Performance 2000 Non-Employee Directors Option Plan

302,433

November 2010

Fully vested

8 yrs 30 days⁽²⁾

n/a plan expired

Resolution Specialty Materials 2004 Stock Option Plan

October 2014

8 yrs 30 days

1,027,197

Tranche A options

38,515

Fully vested

Tranche B performance options

77,034

Fully vested

Director options

142,664

Fully vested

BHI Acquisition Corp. 2004 Stock Incentive Plan

August 2014

10 years

3,670,635

Tranche A options

938,208

Fully vested

Tranche B performance options

938,208

Cliff vest on earlier of 8th anniversary or change in control

Director options

84,423

Director grants vest upon IPO / change in control

Director options

28,141

Fully vested

Hexion LLC 2007 Long-Term Incentive Plan

April 2017

1,700,000

Options to purchase units

403,500

Vest upon attainment of performance targets upon change in control

8 years

Restricted stock units

100,000

Fully vested

n/a

Momentive Performance Materials Holdings LLC 2011 Equity Incentive Plan

February 2021

10 years

13,900,000

Unit Options and Restricted Deferred Units (“RDUs”):

Tranche A Options and RDUs⁽³⁾

Options: 2,840,556

RDUs: 946,859

Time-vest ratably over 4 years; Accelerated vesting six months after certain change of control transactions as defined by the 2011 Equity Plan

Tranche B Options and RDUs⁽⁴⁾

Options: 1,418,303

RDUs: 472,762

Performance-based: Vest upon the earlier of i) the two year anniversary from the date of the achievement of the targeted common unit value following certain corporate transactions or ii) the six month anniversary from the date the targeted common unit value is achieved following certain change of control transactions

Tranche C Options and RDUs⁽⁵⁾

Options: 1,418,303

RDUs: 472,762

Performance-based: Vest upon the earlier of i) the one year anniversary from the date of the achievement of the targeted common unit value following certain corporate transactions or ii) the six month anniversary from the date the targeted common unit value is achieved following certain change of control transactions

(1) 71,301 Options granted between November 2000 - December 2003 were modified during the 4th quarter of 2010 to extend the expiration date to November 13, 2012

(2) 265,550 Options granted between November 2000 - December 2003 were modified to extend the expiration date to November 13, 2012

(3) 709,041 Tranche A Options and 236,341 Tranche A RDUs related to employees of MPM were also outstanding as of December 31, 2011

(4) 354,515 Tranche B Options and 118,172 Tranche B RDUs related to employees of MPM were also outstanding as of December 31, 2011

(5) 354,515 Tranche C Options and 118,172 Tranche C RDUs related to employees of MPM were also outstanding as of December 31, 2011

Summary of Plans

Prior to the Momentive Combination, the Company's parent maintained six stock-based compensation plans: the Resolution Performance 2000 Stock Option Plan (the “Resolution Performance Plan”), the Resolution Performance 2000 Non-Employee Directors Option Plan (the “Resolution Performance Director Plan”), the Resolution Performance Restricted Unit Plan (the “Resolution Performance Unit Plan”), the Resolution Specialty 2004 Stock Option Plan (the “Resolution Specialty Plan”), the BHI Acquisition 2004 Stock Incentive Plan (the “Borden Chemical Plan”) and the 2007 Hexion LLC 2007 Long-Term Incentive Plan. In addition to these plans, the Company’s parent maintains a stock-based deferred compensation plan, which is discussed below. The options granted under each of the option plans were to purchase common units in MSC Holdings. Effective October 1, 2010, in conjunction with the Momentive Combination, stock options to purchase units in MSC Holdings that were granted to our Directors and those granted under the Resolution Performance 2000 Stock Option Plan, the Resolution Performance 2000 Non-Employee Directors Option Plan, the Resolution Specialty 2004 Stock Option Plan, the BHI Acquisition 2004 Stock Incentive Plan and the Hexion 2007 Long-Term Incentive plan to purchase units in MSC Holdings were converted on a one-for-one basis to an equivalent number of options to purchase units in Momentive Holdings. Similarly, the restricted MSC Holdings LLC unit awards granted under the Hexion 2007 Long-Term Incentive Plan, the BHI Acquisition 2004 Deferred Compensation Plan and the Resolution Performance Restricted Unit Plan were converted on a one-for-one basis to units in Momentive Holdings.

2011 Equity Plan

On February 23, 2011, the Compensation Committee of the Board of Managers of Momentive Holdings approved the Momentive Performance Materials Holdings LLC 2011 Equity Incentive Plan (the “2011 Equity Plan”). Under the 2011 Equity Plan, Momentive Holdings can award unit options, unit awards, restricted units, restricted deferred units, and other unit-based awards. The restricted deferred units are non-voting units of measurement which are deemed to be equivalent to one common unit of Momentive Holdings. The unit options are options to purchase common units of Momentive Holdings. The awards contain restrictions on transferability and other typical terms and conditions.

Unit Options

The Tranche A Options were granted with an aggregate grant date fair value of approximately $6. The fair value of each option was estimated at the grant date using a Black-Scholes option pricing model. The assumptions used to estimate the fair value were a 2.17% risk-free interest rate, a 6.25 year expected life, a 37.5% expected volatility rate and a 0% dividend rate. Compensation cost of $3 related to these awards was recognized during the year ended December 31, 2011.

The Tranche B and Tranche C Options were granted with performance and market conditions, each with an aggregate grant date fair value of approximately $3. The fair value was estimated at the grant date using a Monte Carlo valuation method, which is a commonly accepted valuation model for awards with market and performance conditions. The Monte Carlo valuation method requires the use of a range of assumptions. The range of risk-free interest rates was 0.16% to 3.44%, expected volatility rates ranged from 34.6% to 41.7% and the dividend rate was 0%. The expected life assumption is not used in the Monte Carlo valuation method, but the output of the model indicated a weighted-average expected life of 9.2 years. Compensation cost has not been recognized for the Tranche B and Tranche C Options during the year ended December 31, 2011 because as of December 31, 2011, it is not probable the related options will vest. Compensation cost will be recognized over the service period once the satisfaction of the performance condition is probable.

Restricted Deferred Units

The Tranche A RDUs were granted with an aggregate grant date fair value of approximately $4. Compensation cost of $2 related to these awards was recognized during the year ended December 31, 2011.

The Tranche B and Tranche C RDUs were granted with performance and market conditions, each with an aggregate grant date fair value of approximately $2. The fair value was estimated at the grant date using the same Monte Carlo valuation method and assumptions used for the Tranche B and Tranche C Options. The RDUs have an indefinite life, thus the term used in the valuation model was 30 years, which resulted in a weighted-average expected life of 21.4 years. Compensation cost has not been recognized for the Tranche B and Tranche C RDUs during the year ended December 31, 2011 because as of December 31, 2011, it is not probable the related RDUs will vest. Compensation cost will be recognized over the service period once the satisfaction of the performance condition is probable.

Although the 2011 Equity Plan was issued by Momentive Holdings, the underlying compensation cost represents compensation costs paid for by Momentive Holdings on MSC's behalf, as a result of the employees' service to MSC. All compensation cost is recorded over the requisite service period on a graded-vesting basis and is included in Selling, general and administrative expense in the Consolidated Statements of Operations.

Financial Statement Impact

Share-based compensation expense is recognized, net of estimated forfeitures, over the requisite service period on a graded-vesting basis. The Company adjusts compensation expense periodically for forfeitures.

The Company recognized share-based compensation expense of $6, $2 and $5 for the years ended December 31, 2011, 2010 and 2009, respectively. The amounts are included in Selling, general and administrative expense in the Consolidated Statements of Operations. The Company expects additional compensation expense of $19, which will be recognized over the vesting period of the underlying share-based awards. $6 is expected to be recognized ratably over a weighted-average period of 2.7 years, while the remaining $13 will be recognized upon an initial public offering or other future contingent event.

Options Activity

Following is a summary of the Company’s stock option plan activity for the year ended December 31, 2011:



	Momentive Holdings Common Units		Weighted Average Exercise Price
Options outstanding at December 31, 2010	3,101,746		$	7.05
Options granted	5,704,262		$	4.85
Options exercised	(2,853	)	$	3.51
Options forfeited	(98,866	)	$	6.33
Options outstanding at December 31, 2011	8,704,289		$	5.61

Exercisable at December 31, 2011	2,279,701		$	6.03
Expected to vest at December 31, 2011	5,293,209		$	5.64

At December 31, 2011, exercise prices for options outstanding ranged from $3.51 to $29.42 with a weighted average remaining contractual life of 6.8 years. The weighted average remaining contractual life for options exercisable and options expected to vest was 4.1 and 5.8 years, respectively. At December 31, 2011, the aggregate intrinsic value of both options exercisable and options expected to vest was $0.

The total amount of cash received and total intrinsic value (which is the amount by which the stock price exceeded the exercise price of the options on the date of exercise) of options exercised during the years ended December 31, 2011, 2010 and 2009 was less than $1, less than $1, and $0, respectively.

Restricted Unit Activity

Following is a summary of the Company’s restricted unit plan activity for the year ended December 31, 2011:



	Momentive Holdings Common Units		Weighted Average Grant Date Fair Value
Nonvested at December 31, 2010	50,000		$	10.81
Restricted units granted	1,901,556		$	4.71
Restricted units vested	(280,659	)	$	5.91
Restricted units forfeited	(9,173	)	$	4.69
Nonvested at December 31, 2011	1,661,724		$	4.69

The weighted average remaining contractual life for restricted units granted and outstanding was 3.2 years.

Stock-Based Deferred Compensation Plan

In 2004, in connection with the acquisition of Borden Chemical by Apollo, certain key employees of the Company deferred the receipt of compensation and were credited with a number of deferred stock units that were equal in value to the amount of compensation deferred. In total, the Company granted 1,007,944 deferred common stock units under the Hexion LLC 2004 Deferred Compensation Plan (the “2004 DC Plan”), which is an unfunded plan. Each unit gives the grantee the right to one common stock unit of Momentive Holdings. Under the 2004 DC Plan, the deferred common stock units are not distributed to participants until their employment with the Company ends. At December 31, 2011, there were 750,566 undistributed units under the 2004 DC Plan.